Sylvania Platinum — New Thaba JV adds significant value

Sylvania has entered into a JV agreement to process PGM and chrome ores from historical tailings dumps and ROM ore from the Limberg Chrome Mine, located on the northern part of the western limb of the Bushveld Complex in South Africa. The JV will trade and operate as Thaba. The Thaba JV represents a major step in the delivery of Sylvania’s growth strategy and is a significant step forward for Sylvania in expanding its operations and leveraging its expertise in the recovery of chrome and PGM concentrates, adding attributable annual production of c 6,500 4E PGM ounces and introducing 200,000 tonnes of chromite concentrate to Sylvania Metals’ existing annual production profile over 10 years.

Important points of the JV are:

Chromite is used in the manufacture of ferrochrome, which is used in turn in the production of stainless steel. The main market for South African chromite is China. Prices of chromite are reported on a cost, insurance and freight (CIF) basis, which means the seller is responsible for covering the costs, insurance and freight of the buyer’s shipment while in transit, and is paid at the buyer’s port. Prices for South African chromite vary depending on the chrome content of the ore. The JV will be delivering concentrate with 40% to 42% chrome content. Current chromite prices are c US$280/t CIF for the 40% to 42% ore (Exhibit 1). This price will include the rail or road transport cost from the Thaba JV plant in north-western South Africa to a port like Richard’s Bay. We assume this would cost c US$43/t and c $7/t in port fees, totalling c US$50/t. The shipping cost from a port in South Africa to a port in China is c US$20/t, plus c US$10/t marine insurance, totalling US$30/t. Hence the mine gate price that SLP would currently receive is around c US$200/t (ie the current CIF price of US$280/t minus US$50/t (free on board, FOB) minus US$30/t CIF adjustments).

Chromite prices have been trading over US$200/t CIF since January 2022 and are currently at around US$280/t. However, from 2013 to 2021, CIF prices averaged around US$180/t. Hence, taking off the c US$80/t transport and freight costs we have indicated above, we have used US$102/t at mine gate in our valuation, a price that is the same as SLP used in its base case assessment of the value of the JV.

The Thaba JV adds 29.5% to our valuation for Sylvania. Our value for Sylvania’s producing assets remains at 104.4p/share, while we continue to value the exploration assets at book value of 13.8p per share. We value the JV at US$115m (17.2p/share for Sylvania), resulting in a total valuation for Sylvania of 135.4p/share.

Edison values operating mining resources companies at a 10% real discount rate based on the dividend discount model (DDM), allowing for a constant currency approach to forecasts.

Our longer-term forecasts used in our DDM allow for maximum supportable dividends towards the end of our explicit forecast period (FY40), which results in a 100% payout ratio in FY40 and implied thereafter.

The key driver of our valuation is Thaba’s ability to pay dividends, which we have forecast to commence in FY28. This is supported by a healthy and growing cash balance, which we forecast to reach US$38m by FY28, and we forecast earnings to rise from US$8.8m in FY26 to US$9.8m in FY28. The valuation presents upside if a higher pay-out ratio occurs during earlier years.

Our valuation for the JV is US$115m or £90m at the current exchange rate. Sylvania’s 50% share of the valuation is worth 17.2p/share. Our valuation assumes an FY26 earnings multiple of 10.7x.

In our 3 August 2023 report (Lower rhodium prices overshadow strong production), we moderated our forecasts for Sylvania, largely on the back of lower rhodium prices and the rhodium price outlook. The Thaba JV presents new upside potential for Sylvania, which we have included in our forecasts and has a meaningful impact for Sylvania in FY26 in particular, when we forecast 30% growth in EPS.

Exhibit 2 below includes our three-year forecasts for the Thaba JV, including production (guided by the JV announcement and management), our price forecasts and revenue, our operating cost forecasts and the resultant bottom line, include forecast earnings of US$8.8m in FY26.

The JV is to be funded by a capital injection from Sylvania for 50% of the start-up costs and working capital, with the residual being funded by a loan from Sylvania to LMC, which will then inject it into the JV. The loan is forecast to be fully repaid by FY35 via equal instalments, starting in FY26, with interest earned positively affecting Sylvania’s financial results.

Capital expenditure of US$32m will be incurred evenly over the next two years.

The JV is planned to start production in H225 with the first year of full production in FY26. Fifty percent of PGMs and chromite produced will be attributable to SLP.

The PGM plant feed grade is forecast by SLP to be 3.91g/t (the mined chromite plant feed grade will be lower), which translates into a conservative 42% recovery. Total 4E produced is estimated at 13,000oz with 6E at 15,500oz. Half of this production will be attributable to Sylvania, which currently produces 4E of 75,000 oz. Over time and outside of our explicit forecast period, we project an increase in recovery, trending towards the +50% achieved in Sylvania’s current operations.

Recoverable chromite of c 400,000t pa for the JV will see Sylvania for the first time having chromite as a saleable product. The mine gate chromite price assumption of US$102/t is conservative in our view as current prices are in the region of US$280/t CIF.

We forecast US$15.5m in revenue during FY25, based on one quarter of production, which then ramps up to US$62.4m in FY26. Thereafter we assume production levels are maintained at the FY26 levels, although we assume revenue (outside of our explicit forecast period) benefits from higher 4E recovery.

Operating costs are based on a total operating cost of ZAR977/t (guided by SLP) and a treatment rate of ore of 66,000 tons per month, giving an annual operating cost of ZAR773.8m. This should be improved upon but we have used this cost over the life of the JV.

Royalties are formula based and depend on the profitability of the operation, but average around 5% of revenue or about US$3.1m. At start-up, these are close to zero but increase to a maximum of 5% as full production is reached provided that the operation is profitable.

Gross margin is conservatively forecast at 24.6% in FY26, but would be as high as 40% if current chromite prices were to persist. We forecast a small profit of US$0.5m in FY25, followed by US$10.7m in profits in FY26.

By FY26, we forecast that Sylvania’s 50% share of the JV will contribute 13.7% to its combined EBITDA, reducing to 13.3% in FY27 due to rising PGM basket price forecasts. Over the longer term, this contribution is forecast to increase driven by higher JV recovery and falling production in Sylvania’s current operations as dump operations reach end of life (from FY33, we forecast that the JV will contribute 35% of Sylvania’s EBITDA).

Exhibit 3 shows our financial forecasts for Sylvania, including its 50% stake in the Thaba JV. We have lifted our FY24 and FY25 earnings because of more aggressive interest income assumptions for Sylvania from two sources. Firstly, we have incorporated higher interest income due to the currently prevailing high interest rates on Sylvania’s cash balances. Secondly, due to Sylvania’s loan to LMC (currently attracting a 11.75% pa interest rate), the inclusion of the JV has further enhanced our interest income forecasts. The combined impact of these changes, plus a proportionate consolidation of the JV, lifted our earnings forecasts by c US$6m pa from FY24 to FY26. As a result, we have increased our FY24 EPS forecast by 18% to 10.6c and our FY25 forecast by 16% to 13.0c.

We understand that the Thaba JV will be accounted for by Sylvania using proportional consolidation, which means the addition of 50% of each relevant JV line item as per Exhibit 2 to each relevant line item as per Exhibit 3 below. The JV is forecast to go into full production in FY26, driving a 22.5% increase in Sylvania revenue (allowing for its 50% of the JV production). After allowing for the associated JV cost and other increases, our FY26 EPS has been lifted to 16.8c, which represents 29% growth on the FY25 base.